Monday, December 2, 2013

As a geoscientist that was employed
in the oil industry for nearly three decades, I still watch the world's oil
markets closely. I had been watching the relationship between the price
of oil (West Texas Intermediate or WTI) and the price of gasoline for the past
couple of years and have suspected that there is somewhat of a disconnect
between the two.

Let's open by looking at this graph that shows the price of West Texas
Intermediate in red and the price of all formulations of regular gasoline in
blue since 1990:

You will notice that except for
short periods of time in the mid-2000s that the price of regular gasoline
tracked the price of oil quite closely. This was the case for 21 years,
until 2011 when the price of gasoline began to track higher than the price of
oil with this trend continuing over most of the period between early 2011 and
mid-2013 as shown on this graph:

Let's take a closer look at the
relationship between the two over the period from 2010 to the present:

How much of a difference does this
"new reality" make to the price of a gallon of gasoline? In
recent weeks, WTI has dropped from a one year high of $109.62 per barrel in
early September 2013 to its current level of $94.00 per barrel, a drop of 14.2
percent. Over that period, the price of gasoline has dropped from around
$3.59 a gallon to its current level of around $3.29, a drop of 8.4 percent.
While there is somewhat of a disconnect between the price of oil and the
price of gasoline, it is far better now than it was in the early part of 2013
as you will see.

At the end of January 2013, WTI was
priced at around $98 per barrel and by early March 2013, it had fallen to just
over $90 per barrel, a drop of 8.2 percent. Over the same period,
the price of a gallon of regular gasoline rose from $3.36 to $3.78, an
increase of 12.5 percent. Had the historical relationship between the
price of WTI and the price of gasoline held, the price of gasoline in March
2013 should have been around $3.20 per gallon, 15.3 percent lower than it was!

I do realize that there is a lag
between changes in the price of oil and the price of gasoline, however, looking
back at historical data before 2006, that lag is very short other than for short periods of
time after 2001 as shown on this graph:

Exports of finished gasoline have
risen by a significant amount since late 2010, hitting levels that have not been seen since the Second World War. For example, in December
2009, U.S. refiners exported 9.536 million barrels of finished gasoline.
In December 2010, this rose to 16.022 million barrels, then to 19.103
million barrels in December 2011 and fell slightly to 18.299 million barrels in
December 2012. Overall, from December 2009 to December 2012, gasoline
exports rose by 91.9 percent. Even worse, exports in December 2012 were
up 191 percent compared to December 2008!

Who are the beneficiaries of this
generosity?

Here is a graph showing the growth in Mexico's
imports of United States-produced gasoline:

Here is a graph showing the growth in
Venezuela's imports of United States-produced gasoline:

Here is a graph showing the growth in
Columbia's imports of United States-produced gasoline:

Here is a graph showing the growth in
Guatamala's imports of United States-produced gasoline:

Oddly enough, here is a graph showing the growth in
Nigeria's imports of United States-produced gasoline:

Last, here is a graph showing the growth in
Ecuador's imports of United States-produced gasoline:

You will notice that, in almost
every case, the rise in exports of United States-produced gasoline began to
rise in the 2010 to 2011 timeframe. It seems oddly coincident with the
disconnect between the price of oil and the price of a gallon of gasoline at
the pump, doesn't it?

Just in case you wondered, here is graph showing the number of operating
refineries in the United States since 1982:

The number of operating refineries in the United States has fallen from 254 in 1982 to its current level of 139.

Notice that the weekly supply peaked
at 22.037 million barrels per day in February 2007. Since then, it has
fallen to its current level of around 20 million barrels per day, a 10 percent
reduction. Since the beginning of 2011 when exports of U.S.-produced
gasoline began to ramp up, domestic gasoline supplied has increased from
between 18.8 and 19.8 million barrels per day. Obviously, fewer
refineries have become either larger or more efficient and have increased their
capability to produce gasoline. Those refineries that remain are
exporting a heftier percentage of their gasoline production to offshore
consumers.

Here is a graph showing annual gasoline consumption in the United States, noting the slight drop in consumption levels since 2007:

Here is a graph showing the drop in
gasoline consumption on a year-over year basis (in dark grey):

Notice that while gasoline
consumption dropped by just over 0.2 million barrels per day in 2011, it
is expected to fall by less than 0.1 million barrels per day in 2014, a drop of
only 0.4 percent. Since 2007

Gasoline consumption fell due to
increased overall fleet efficiency and high prices which dampened the
enthusiasm for light vehicle travel. While consumption did fall, it
didn't fall by as much as exports rose, suggesting that the current disconnect
between the price of oil and the price of a gallon of gasoline could be
related, in part, to the increased exports of gasoline.

I realize that there are many interrelated factors at play in the world of gasoline supply, demand and pricing, however, the coincidence between elevated prices and elevated exports is compelling. In the future, when we read that
gasoline prices are high because of refinery maintenance or shutdowns, perhaps
we can reflect on the fact that United States refiners have tripled their
exports of gasoline to other nations over the past few years, tightening the domestic supply and making
American motorists more vulnerable to shortages that push the domestic price of
gasoline higher, out of step with the price of the raw product.

5 comments:

The ethanol situation is a moving target that bears watching says Shawn Bartholomae, CEO of Prodigy Oil and Gas Company in Irving, Texas. The financial impact on US citizens has not all been good, with the price of corn dramatically driving up the cost of beef, cereals, etc. The battle goes on as engine manufacturers say damage will be done to cars at higher level of ethanol mixed in with gasoline. Now it is even beginning to be a State vs. Federal legal battle. Where will it all end?

An obvious solution is to decree that all new automobiles sold in America must be capable of burning methanol, ethanol and gasoline. A flex fuel car could also be deemed the equivalent of two ordinary cars under the CAFE regulations. The electronics cars have these days would mean it would only take some slight modifications to make sure the fuel lines, gaskets etc could stand all three fuels. The situation in the US would end up like that in Brazil, with consumers buying gasoline, ethanol, methanol or blends depending on price and convenience. While ethanol is limited by land availability and food prices, far more methanol than is needed can easily be produced from America's abundant coal and gas. If you're worried about global warming, build nukes to replace coal and gas fired generators. The surplus fossil fuels could be used to make methanol, or if you wished, converted straight into gasoline.

Doesnt converting corn to fuel for cars drive up food prices since corn and corn syrup are in many foods? Also, millions of other equipment with gas engines are being hurt with ethanol, mowers, trimmers, chain saws, generators, etc. Not possible to replace all these. Not counting the millions of cars already not flex fuel vehicles.If the govt would stop foreign aid and stop giving food stamps and free health care to millions of non citizens, uncle Sam could buy all citizens a new flex fuel car! Ethanol gets less mpg than gas and also corroded fuel tanks and fuel lines, attracts moisture, so just replacing engines doesn't help. Vast majority of Americans live paycheck to paycheck and can't afford a new car, much less the artificially elevated oil and now natural gas prices.Problem is greed.

I'm also for some new nuclear plants, if there safe, more dams/hydroelectric, give businesses tax breaks to put solar panels, wind power on there roofs. Water supply is an ever increasing prob, build dams now to keep all this floodwater. Other countries are building Huge dams, we are tearing them down.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.